I get asked this question a lot by business owners. How can I pay myself? Or when can I start paying myself as the business owner? The issue around owner’s compensation is a great one.
There are two different thoughts on this topic.

One thought is you can pay yourself off the top. As money comes in, you can set aside a certain amount that you are going to pay yourself for your time, energy and for what you’ve done to grow this business.

The other thought is you want to keep the money in your business to grow for business expenses, things like that. At the end of the year, if you have excess funds, give yourself a little money to compensate yourself.

Neither one is right, neither one is wrong. It’s a matter of personal preference and how you want to budget your company. But here’s the thing, there is a difference in how you pay yourself. So that’s what I want to address today.

How to Pay Yourself as a Sole Proprietor

The treatment is different for each approach so it comes down to business structure. The structure you choose determines how you act in your business; it sets the rules and lays the foundation. Depending on the structure you choose, there are certain methods you can use to pay yourself as the owner.

One option is you can simply take money as needed to pay yourself. We usually call this a draw or a distribution. This is typically what’s done in a sole proprietorship or an LLC. It is not considered a deductible expense, but rather a transfer of equity. It’s money from your business that shifts over to you as the owner. So again, not a deductible expense.

How to Pay Yourself as a Corporation

The other option is you cut yourself a proper paycheck with taxes, being withheld and submitted to the taxing authorities on your behalf. This is typically done in corporations if you are an S-corporation, you are considered an employee and the employer. You actually have to put yourself on a regular payroll and cut yourself a check and have payroll taxes withheld and submitted quarterly.

At the end of the year, you will have to issue yourself a W2, you have to act as a corporation.

But here’s the thing, that payment that you pay yourself is considered a business expense, therefore it is deductible. That’s different treatment than if you were a sole proprietor or an LLC and simply took a draw from the company on your behalf.

You can benefit as a business owner but certain rules must be followed. There are other means of compensation and benefits for business owners, such as health insurance and things of that nature.

It all Depends on Business Structure

Do you see how business structure makes that determination of how you can pay yourself?

You can benefit as a business owner but certain rules must be followed. Compensating yourself as the business owner certainly has its perks. It may take some time to get your business to the point where you start benefiting from these treatments, but you will benefit in the end.

If you enjoyed this and you’d like to hear more topics like this for small businesses, follow the link below, or leave me a comment. Or if there’s a particular issue you’d like to learn more about, I’d love to hear from you.